40 Wednesday February 16 2022 | the times
Business
T
Enterprise
Network
Dreams realised
Richard Robinson,
co-founder of legal tech
firm Robin AI, believes
venture capital has
become more accessible
to black entrepreneurs
since the Black Lives
Matter protests.
Health matters
A stroke knocked
surfing entrepreneur
Nick Hounsfield off his
board. But the founder of
Bristol-based The Wave
is back with renewed
passion and plans for six
more sites.
Sign up now for The
Times Enterprise
Network’s weekly
newsletter for tips and
insight from Britain’s
leading entrepreneurs
thetimes.co.uk/tenI
n the noisy case lodged against
the founders, management and
board of directors of Peloton,
nary a word has been said for
the defendants. If you read the
materials posted by a small, New
York-based hedge fund, you would
think those associated with Peloton
were guilty of war crimes.
According to the angry hedgies,
Peloton’s founders John Foley and
Tom Cortese, who also built and ran
the business, lost tens of billions of
dollars of shareholder money. They
expanded the business too quickly,
they hired too many people, they
allowed inventory to balloon, they
foolishly leased a large office
building in Manhattan prior to the
pandemic, they made a bad
acquisition, they erected a factory
that was too large and under their
watch there were some accidents
associated with the company’s
equipment. Even worse for the
hedgies was the damning fact that
Peloton was the worst-performing
stock on the Nasdaq during 2021.
In the meantime, Peloton’s board,
if you agree with the plaintiffs, was
composed of, among others, Dopey,
Sleepy, Grumpy and Sneezy.
Lost in the fury of this assault is
the following. Foley and Cortese
started Peloton in 2012 convinced
that there was an opportunity to
build a large online fitness business.
At the time, the sceptics questioned
their insistence on building low-
margin hardware, worried about the
sums required to attract customers
and distribute the bicycles, fretted
about the potential churn of
subscribers, muttered that this was
just another health fad and conjured
up the spectre of Amazon, Apple,
Netflix and others entering the
market.
The founders stuck to their guns,
raised six rounds of capital in the
private markets, expanded into
foreign markets, turned fitness
instructors into online stars and, in
September 2019, took the business
public at $29 per share when
Peloton had 1.4 million subscribers.
Public investors, including the
hostile hedge fund that bought a
small number of shares, eagerly
hopped on to a fast-moving
bandwagon and just couldn’t get
enough of Peloton. The ambulance-
chasers drove the stock to $167,
giving the business a perceived — as
opposed to real value — of about
$50 billion.
Peloton, though you would be
hard-pressed to discern this from
the brief filed by the hedgies, was
the third-best-performing stock on
the Nasdaq in 2019.
There clearly have been mis-
steps. The management expanded
the business too quickly and may
have thought — along with theheads of other companies propelled
by the tailwinds of the pandemic —
that the new rate of growth was
sustainable. I’m sure there were
plenty of other things that, in
retrospect, Peloton’s leaders would
have done differently. But that’s
always the case especially for high-
growth companies caught in the
middle of a hurricane.
The founders were right, and
remain correct, about the most
important aspect of Peloton — the
long-term potential for the business.
Peloton operates in a market that is
still in its infancy. Best of all, it is a
business with some of the highest
customer ratings and lowest churn
rates of any online subscription
company, which is a reflection of
monthly family memberships
costing $39 — a bargain compared
with regular gyms.
The board, too, deserves plenty of
praise for persuading Barry
McCarthy to become Peloton’s new
chief executive.
Since his appointment, McCarthy,
the former chief financial officer forboth Spotify and Netflix and one of
the most unsentimental and clinical
operators in the technology
business, has made clear that he will
continue to rely on the founders’
product and marketing instincts.
And what of the hedgies? They
continue to press for the sale of the
business — just like some of their
predecessors did when Jeff Bezos,
the founder of Amazon, after
overexpanding two decades ago
during the dotcom era, came close
to losing his job. In 2000 Amazon
stock lost almost 80 per cent of its
value. Today, the hedgies would run
for the hills if they could get $75 a
share for Peloton compared with the
$35 at which the stock trades.
For Peloton, as for Amazon,
patience and persistence will pay off.
If anyone doubted the virtue of a
properly designed dual-class stock
for founders and founding
shareholders, Peloton is the perfect
advertisement. Without this
safeguard, Peloton could have been
toppled by the mob.Sir Michael Moritz is a partner at
Sequoia CapitalPatience, rather
than hedging
your bets, will pay
off with Peloton
Michael
MoritzPeloton has one of the best customer
ratings of online subscription services